Mohacsy's Safe Portfolio Member Forum

[elena_murooni]

I thought this was cut & dry so I thought I'd share it with you. It leaves the imagination open...

Question:
The Federal Reserve said on March 18 they will now start buying long-term Treasury bonds and mortgage securities as a way of getting more dollars into the economy. How would they do that -- by using up currency reserves? How big of an impact can that potentially have on the U.S. bond market?

Answer:
No foreign reserves are required for the Fed to buy its own debt. They can buy U.S. Treasuries and agency bonds (Fannie and Freddie) through crediting the seller with cash and adding those securities to the Fed's ever-expanding balance sheet. Such purchases can have a dampening effect on interest rates (especially mortgages), but long-term effects are illusory as these new debts will likely diminish investor confidence in the value of the U.S. dollar and dollar-denominated assets.